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Tech: The Palm Pre Takes on Apple's iPhone

You've probably never heard of Jon Rubinstein, but in computer-engineering circles, the 52-year-old former Apple engineer is a legend. He helped create two of the most iconic products of the past decade: the original brightly colored egg-shaped iMac, which saved Apple from going out of business, and the iPod, which turned that once-ailing computer maker into the hottest brand in consumer electronics. So in the summer of 2007, when Rubinstein (nickname: Ruby) joined Palm, the beleaguered consumer-electronics company, to develop a new smartphone, people in the industry began paying attention once again to an outfit that most had written off as dead. They also began wondering whether Palm could do what every other phonemaker has tried to do and failed: create a device that could outshine Apple’s iPhone. The result is the Palm Pre which debuts today at the Consumer Electronics Show in Las Vegas and will go on sale by the middle of 2009. It embodies Palm's best shot at reclaiming both market- and mind-share.

Rubinstein, Palm's executive chairman, was quick to downplay comparisons when NEWSWEEK met with him at Palm's Sunnyvale, Calif., headquarters in December for a sneak peak at his latest creation. "We're not trying to build an iPhone clone," he said. And though Apple CEO Steve Jobs was furious about Rubinstein's move to Palm, and grew even angrier when he started poaching some of Apple's top talent, Rubinstein insists he's not driven by a desire to upstage his former boss and longtime colleague. "I worked with Steve for 16 years. Now supposedly I'm a traitor. But this has nothing to do with Apple," he says.

Still, over the course of two days, Rubinstein and others at Palm couldn't help pointing out that the Pre outperforms the iPhone. Palm's advantages include faster Web browsing, a better camera, and the ability to run many applications at the same time. Egos being what they are in the Valley, it's easy to believe that despite all the talk about not competing with Apple, these guys do, in fact, secretly harbor the desire to knock Apple firmly on its backside—and that while the marketing guys may have decided, correctly, that it's best not to pick a fight with a bigger, wealthier opponent, the engineers simply can't help talking smack.

At the very least they are praying that Rubinstein can breathe new life into Palm, and that the company can stop its steep decline and hang on long enough for the Pre to make a difference. The stakes could not be higher for a 16-year-old company that boomed in the 1990s thanks to its Palm Pilot personal digital assistant and then boomed again by morphing the Pilot into a smartphone called the Palm Treo. At one time these gizmos were the cutting edge of cool; today, they seem like relics from some dark, distant age, eclipsed by the Research in Motion BlackBerry and the iPhone. Hampered by an aging software platform, Palm has limped along by selling devices that run Microsoft's Windows Mobile software. But revenue is plunging, losses are mounting, and Palm is burning cash. In December Palm had to take a $100 million investment from its private-equity sugar daddy, Elevation Partners, in order to remain afloat.

Nevertheless the mood is upbeat at Palm; though the company has announced layoffs, it is also bringing aboard new talent. Equally upbeat are the people at Elevation Partners, which invested $325 million in Palm in June 2007. Back then Palm was starting to look like high-tech roadkill. But Roger McNamee, the veteran Valley investor who runs Elevation Partners, saw in Palm a company with a well-known brand and well-established carrier relations in a market that he was convinced was about to explode. McNamee came to the deal with a simple thesis: More than a billion cell phones are sold each year, but only about 5 percent are smartphones.

Over the next few years, smartphones will start to make up an ever-bigger slice of the pie, perhaps growing to 50 percent of the market within a decade and becoming the most popular way of accessing the Internet. The mobile-computing space today looks a lot like the early days of the PC market, when it was obvious that PCs were going to be huge but nobody knew who the winners would be and there was loads of growth yet to come. Right now a half-dozen smartphone platforms are competing in the market, but none has gained dominant market share. As McNamee sees it, the market opportunity is so big that Palm can succeed even if Apple and RIM and all the others continue to grow. "Our success is totally independent of what the others do. We would not have invested based on the premise that RIM and Apple would fail. If we get even 1 percent of global market share," he says, "we'll be huge compared to where we are now."

McNamee's partners at Elevation include U2 frontman Bono and, more notably, former Apple finance chief Fred Anderson, who, alongside Rubinstein, helped engineer the turnaround at that company a decade ago. Anderson is the one who brought Rubinstein to Palm. He insisted that Elevation had only agreed to put money into Palm if they could convince Rubinstein to come aboard. At that time, in the summer of 2007, Rubinstein had left Apple and was living in Puerto Vallarta, Mexico, building a vacation house. Palm flew a team of execs down to meet with him over a three-day weekend. They showed Rubinstein the projects they were working on, including a new operating system that was code-named Nova. Palm's aging operating system, Palm OS, was originally created for a relatively simple personal organizer; it was then added to and patched up to do things like power a cell phone—a task it was never intended to perform. It was a bit like using a lawn-mower engine to build a go-kart, then adding a bigger chassis and turning the go-kart into a real car, then turning that into a plane, and then trying to make the plane fly to the moon. Palm needed a fresh start.

Rubinstein loved the new operating system and signed on. He immediately decided on a radical course—killing off almost all of Palm's products and projects except for a couple of "transitional" devices that could keep sales coming in while engineers toiled away on Nova. Rubinstein brought in a slew of new executives, replacing all of the executives in engineering and much of the engineering staff. This crash course of paring the company back to its core is exactly what Apple did a decade ago. Jobs and his team killed off dozens of products, leaving Apple with only four things to sell: two laptops and two desktop PCs. Then they put a huge amount of effort into developing a new operating system, called OS X, which would become Apple's key product in the decade to come. Now, at Palm, "we're using the exact same playbook," Rubinstein says.

Rubinstein's idea is to leap ahead of everyone else in the mobile space by creating a new software platform to power the Pre and a string of as yet unannounced mobile devices. If the plan works, Palm will bounce back and become cool—and profitable—once again. If not, "we turn into just another Windows Mobile phonemaker," Rubinstein says—which is another way of saying they roll over and die. Operating systems are tricky things to create, but Rubinstein believes that without this piece of the puzzle a tech company cannot control its destiny. Palm's Nova system, which will bear the official name Palm Web OS when it ships, is based on the open-source Linux operating system and has been created from the ground up to run only on mobile devices. In contrast, Apple's OS X was originally created for personal computers and then got squeezed down into the iPhone.

While the iPhone has demonstrated the power of putting a real computer operating system on a mobile device, the iPhone itself is far from perfect. For one thing, the battery life on the new 3G model is abysmal. And while it is cool to be able to browse the Web from a handheld device, the iPhone's Internet experience is nowhere near as good as the experience you get on a laptop or desktop computer. It's much slower; Rubinstein and his team say that's because the OS X code is not lean enough to run swiftly on a mobile device's relatively tiny processor and small memory footprint. And you can only do one thing at a time. To change applications—to go from checking e-mail to making a phone call to putting an appointment in your calendar—you have to keep climbing back to the home page and then down to the other application. Apple introduced OS X for its personal computers in 2001, but pieces of the system trace their roots back to the 1980s, when they were used in the operating software of computers made by Jobs's other computer company, NeXT. Palm sees an opportunity to come out with something newer, better and—perhaps most impressive to gadget geeks—faster. A lot faster. "We're already four times faster than the iPhone, and we're still optimizing," McNamee boasts.

So how good is the Pre? The design of the hardware is wonderful. The phone is smooth and sleek, with rounded edges and a 3.1-inch (diagonal) multitouch screen that lets you pinch and slide objects the way you do on an iPhone. (The iPhone's screen is slightly bigger, at 3.5 inches, diagonal.) There's also a QWERTY keyboard that slides out from underneath. You can make phone calls without ever opening the slider, and in that closed position the phone is 2.3 inches wide, 4 inches long and two thirds of an inch thick. It feels small in your hand, and it's easy to carry in a pocket, weighing just under 5 ounces. Palm hopes the small footprint (and nice touches like a thin leather carrying case) will be appealing to people who have been intimidated by smartphones like the iPhone and the BlackBerry.

Under the hood is a speedy new microprocessor from Texas Instruments that runs videos quickly and smoothly, with less of the herky-jerkiness that mobile devices are known for. The phone has 8 gigabytes of storage, which is decent but not great; it can run Adobe Flash, and can cut, copy and paste, which iPhone can't; it supports multimedia messaging service (MMS) so you can send text messages with photos attached, which iPhone can't do; it has a 3 megapixel camera and a flash, which iPhone lacks. There's a button that lets you buy music from Amazon's download store. Then there's the multitasking. Want to talk on the speakerphone while browsing the Web and entering stuff in your calendar? No problem. Palm expects people will keep 15 to 20 applications open at the same time.

Palm's engineers have done some really slick things with applications themselves, especially contacts and calendars. You can pull together multiple calendars and view them all at once—say, your work calendar, your home calendar, even calendars from other people, like your spouse's Google calendar (your spouse needs to give you the log-on info). The contact manager pulls contact information from multiple sources—Yahoo contacts, Google contacts, Facebook contacts. A listing in your address book can contain every way of reaching that person—via work mail, Gmail, or Facebook mail, for example—and lets you send a message to a friend using any one of these. Also, the applications talk to one another. When the calendar application prompts you for a reminder about a meeting, it also pulls up a list of the people who will be attending, with their contact info. So if you're running late, you can let everyone know.

So: is it an iPhone killer? McNamee wishes people wouldn't ask that question. "Everyone in the cell-phone business has missed the point. They're all trying to make an iPhone killer. I don't want to compete with Apple. Why the hell would you want to get in the way of that machine? I look at the guys who are trying to compete with Apple and I think, Are you guys crazy? I just want to learn from Apple's experience." Nonetheless, the "Will this kill the iPhone?" question is the first one everyone asks about any new high-end mobile phone today. And the answer is, well, probably not. Not because the Pre isn't terrific—it is—but because Apple's brand is so powerful, and because Apple has sold 13 million iPhones, and because there are 10,000 applications already written for the iPhone. Nonetheless the Pre has moved the ball forward in some very significant ways. The experience it delivers is much closer to what we get on a laptop or desktop computer, which is essential if mobile devices are to become the hub of our Internet lives rather than mere peripherals that attach to a personal computer.

Most important, the Pre represents only a first shot. Rubinstein and his engineers are already preparing a family of devices that will run on the Palm Web OS. Could it be that Apple has staked out an early lead with a breakthrough product only to be passed by others? It's happened before. In 1984 Apple introduced its first Macintosh. The machine featured a graphical user interface and was way ahead of its time. But several years later Microsoft copied the idea and created Windows, which gained 90-plus percent of the market while Apple's share lingered in the low single digits. That bit of history may be why Rubinstein seems to be feeling so good these days. "Apple wants everyone to believe that it's game over, and they won," he says. "But I don't think so. I think this is just the beginning."